Good morning and welcome to the Highwoods Properties Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, February 6, 2019.

I would now like to turn the conference over to Brendan Maiorana. Please go ahead..

Thank you and good morning. Joining me on the call this morning are Ed Fritsch, Chief Executive Officer; Ted Klinck, President and Chief Operating Officer; and Mark Mulhern, Chief Financial Officer. As is our custom, today's prepared remarks have been posted on the web.

If any of you have not received yesterday's earnings release or supplemental, they're both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre.

Also the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press releases as well as our SEC filings.

As you know, actual events and results can differ materially from these forward-looking statements. The Company does not undertake a duty to update any forward-looking statements. I'll now turn the call to Ed..

Thank you, Brendan, and good morning everyone. To state the obvious, it's been a volatile couple of months in the financial markets as the Dow, RMZ, interest rates, and other financial indicators have whipsawed. Volatility in the financial markets is nothing new. In fact, it seems to be the new norm.

When looking back a year ago, there was a volatile start to 2018, although the trend lines were opposite. It's easy to get swept up in the headlines and day-to-day movements in the financial markets.

However, economic fundamentals, as reflected in the unemployment rate and job creation, remain conducive to growth, matches the conditions we've seen on the ground in BBD Office-ville, where fundamentals remain solid. We continue to experience healthy demand from customers and prospects.

New supply risks are generally in check across our footprint, and rents continue to rise. We had a lot of discussion last year about Amazon's HQ2 search, especially after four of our cities were included in their whittled down list from 238 to a final 20.

The ultimate HQ2 search turned out to be what we call HQ2.5, following Amazon's announcement that it split the requirements among New York, Metro DC, and Nashville, where it will put an operations center.

To put this Nashville job growth announcement in perspective, Amazon's plan to add 5,000 new jobs is the single largest, office-using job expansion announcement in Nashville's history. And on a per capita basis, 5,000 new office jobs in Nashville is a greater increase than the 25,000 new jobs Amazon will create in New York.

Amazon's Nashville offices will be housed beside our now under way Asurion project and our 1100 Broadway development site where we can build up to 1.2 million square feet. Needless to say, we remain jazzed about the outlook for Nashville.

Overall, as evidenced by our strong leasing stats posted in the fourth quarter, with GAAP rent spreads up 20.2% and net effective rents 6.3% above our trailing five quarter average. We're pleased with the performance and encouraged by the outlook of our portfolio.

We continued to see strong interest for expansion and relocation space from users leveraging the business friendly environments, high quality of life, and moderate cost of living enjoyed across our markets. Turning to our results, 2018 was a solid year for our Company.

First, we delivered per share FFO of $3.45, near the high end of our original outlook of $3.35 to $3.47. Same property cash NOI growth was 0.7% or 1.1% when adjusting for fourth quarter 2018 dispositions not included in our original forecast. This compares to our original range of 1% to 2%.

Cash NOI growth was impacted by higher-than-expected concessions, driven by earlier-than-expected sizable future year renewals, which sets us up for better growth going forward.

During the year, we achieved rent spreads on second gen office leases of plus 4% on a cash basis and plus 19% on a GAAP basis, while keeping leasing costs consistent with prior trends.

Second, we announced $285 million of 98.3% pre-leased development, delivered $85 million that was 99.6% leased, and increased the pre-leasing on our pipeline by signing 1 million square feet of first gen leases. Our $691 million pipeline is now 93% pre-leased. Development continues to be a key growth engine for our Company.

Third, we continued to cull our portfolio with the sale of $86 million of non-core properties. Fourth and finally, we improved the balance sheet while investing heavily in our development pipeline and replenishing our land bank, without issuing any shares on the ATM. We were able to maintain our debt-to-EBITDA ratio at 4.75 times.

In the fourth quarter, we delivered FFO of $0.86 per share. Our same property cash NOI growth during the quarter was plus 1.5%, which includes the full quarter impact of Fidelity's move-out at 11000 Weston in Raleigh. We leased a healthy 918,000 square feet of second gen office at positive cash rent spreads of 5.8% and GAAP rent spreads of 20.2%.

Portfolio occupancy finished the year at 91.9%, toward the upper end of our most recent outlook. As a result of our continued strengthening cash flow, bolstered by improving rents and development deliveries, we increased our dividend for the third consecutive year to an annualized rate of $1.90 per share.

Since the beginning of 2017, our dividend is up 12%, which is in addition to the $0.80 per share special dividend we declared in December of 2016. In last night's earnings release, we provided our initial 2019 per share FFO outlook of $3.44 to $3.56 with a mid-point of $3.50.

There are a number of items that impacted our year-over-year growth rate, including the 11000 Weston restoration fee received in 2019 [ph] that won't repeat in 2019; the increased G&A expense attributable to certain in-house leasing costs that are now expensed but were previously capitalized; and late in 2018 dispositions.

Adjusting for these items, our FFO per share growth in 2019 would be 3.8% at the midpoint of our outlook. A few of the other major items in our outlook include same property cash NOI growth of 2% to 3%, which Mark will provide more color on.

Our dispositions outlook is $100 million to $150 million, which represents a relatively typical year of sales activity for us. Our acquisition outlook has a low-end of zero and a placeholder of $200 million at the high-end. This range may sound familiar since it's the same we provided for the past two years.

Given the wall of capital available to acquire BBD located assets, there haven't been quality buildings available at the risk-adjusted returns we feel would be acceptable to our shareholders. Lastly, our development outlook is $100 million to $375 million.

We continue to have conversations with several large anchor prospects that give us confidence toward the likelihood of announcing more projects in 2019. Also, last evening, we announced we will develop GlenLake Seven, a $41 million, 126,000 square foot office building in West Raleigh. This will be the fifth building in our GlenLake campus.

The existing four buildings, which encompass more than 600,000 square feet are 98% occupied. The project will break ground in the second quarter of 2019 with construction scheduled to be completed in the third quarter of 2020 and a targeted stabilization date in the fourth quarter of '21.

The project is 28% pre-leased based on Highwoods intention to occupy approximately 35,000 square feet upon completion. We already have interest from prospects, which gives us additional confidence of meeting our projected stabilization date.

In addition, our most recent delivery in GlenLake stabilized in the beginning of 2017, two quarters ahead of pro forma and a NOI of some 10% above our original underwriting.

Our success at GlenLake, and other recent, modest-sized spec projects we've started in Raleigh, notably 751 Corporate Center and 5000 CentreGreen, were factors in our decision to start GlenLake Seven.

In closing, I applaud our team for their dedicated efforts throughout 2018, especially in posting impressive GAAP and cash rent growth numbers, inking a whopping 1 million square feet of relets, and capturing 1 million square feet of first gen leases.

We are excited to kick-off 2019 with a third consecutive dividend increase, an improved organic growth outlook, and sustained optimism around our development platform, including our 2019 scheduled deliveries of $195 million, encompassing 551,000 square feet that are 100% pre-leased. I now turn the call over to Ted..

Thanks, Ed, and good morning. After over a year of HQ2 suspense, we're excited Amazon selected Nashville for its Operations Center of Excellence.

This speaks to the strength of the Nashville market and it will be next door to our 553,000 square foot Asurion headquarters development and our 1100 Broadway site where we can build up to 1.2 million square feet of office.

Amazon's announcement is just one of the many stories shining a spotlight on our Southeastern footprint, which benefits from high quality of life, low business costs and access to well-educated talent pools. We expect continued interest in our markets as economic fundamentals remain strong.

Demand is healthy across our footprint, while supply remains generally in check. In addition to healthy market fundamentals, we are optimistic about our portfolio and expiration outlook. We made meaningful progress in 2018, reducing future near-term rollover risk by locking in several large 2019 and 2020 renewals.

At year-end 2018, our 2019 expirations represented 8.9% of annualized cash revenue, which is approximately 110 basis points below where the average was the prior two years.

Turning to the fourth quarter, we had strong leasing evidenced by beating our prior five quarter average on several fronts; 384,000 square feet of new second generation leases was a 65% beat; $16 per square foot net effective rents was a 6.3% beat; 20.2% GAAP rent spreads was a 330 basis point beat and 5.8% cash rent spreads was a 340 basis point beat.

Our fourth quarter same property cash NOI was positive 1.5% despite lower average occupancy compared to last year. This growth was driven by annual bumps on nearly all of our leases and solid rent spreads on commenced leases. In 2019, we expect same property NOI growth to accelerate over 2018.

Our portfolio occupancy improved 60 basis points from the end of the third quarter, mostly attributed to new starts in Tampa, Atlanta and Richmond. Our portfolio overall ended the year at 91.9%, and six of our nine divisions were above 92%.

Atlanta and Raleigh were the only two divisions where occupancy was below 90%, and given these are our two largest divisions by square footage, they represent sizable organic growth potential.

After taking care of three of the five 2019 expirations greater than 100,000 square feet earlier in 2018, we were only left with FAA and T-Mobile going into the fourth quarter 2018. The FAA lease is scheduled to expire in 4Q 2019 and we remain confident in signing a long-term renewal.

With T-Mobile, we executed a short-term extension taking their 116,000 square foot lease through the end of first quarter of 2020. We now have five quarters before T-Mobile vacates, and given our lead time, combined with a healthy parking ratio and efficient floor plate at Preserve V, we expect good interest in the space.

As is a normal pattern for us, we do expect occupancy to dip early in the year and then recover in the latter part of the year. We expect year-end occupancy of 91.25% to 92.75%, with a midpoint of 92%. While early in the year, we feel good about the interest we're seeing in a few large vacancies in our portfolio. Now, to our markets.

Atlanta posted positive net absorption of 331,000 square feet in the fourth quarter, as reported by CBRE. We are tracking 3.3 million square feet of development under way, which is around 30% pre-leased. This approximates 2% of total stock.

Midtown, rapidly growing in its appeal and vibrancy as evidenced by significant recent announcements, accounts for nearly half of this new supply. We signed 300,000 square feet of second generation leases during the quarter with 16.9% GAAP rent spreads.

We continue to make progress releasing the 137,000 square foot FBI vacated in Century Center in 2018. As mentioned previously, we've released 32% and now have signed LOIs to take us to 83%. We've also had strong leasing in Buckhead the past two quarters and are now stabilized at One and Two Alliance and Monarch Tower.

We're heavily focused on leasing up the remaining approximately 100,000 square feet in Monarch Plaza, where we're seeing significant interest. Lastly, Riverwood 200, which you may recall we started 39% pre-leased, is currently 91.4% leased, up 120 basis points from the last quarter, and is expected to stabilize in 2Q '19.

The overall Raleigh market garnered 944,000 square feet of positive net absorption during the quarter, per Avison Young. Class A asking rates have increased 8% year-over-year and overall Class A market occupancy is unchanged over the same period, ending the year at 90%.

There are 2.2 million square feet approximately of office space under construction, which is approximately 55% pre-leased. This represents 4.5% of total stock and is spread across six submarkets. We signed 93,000 square feet of second generation leases during the fourth quarter at robust GAAP rent spreads of 21.1%.

We have seen steady interest in the 178,000 square foot 11000 Weston property, previously occupied by Fidelity. We have over 500,000 square feet of prospects, including both single building and multi-customer users. We are encouraged by the level of interest we've seen and look forward to converting this space into signed leases.

Our 751 Corporate Center development, which was 35.3% pre-leased at announcement, is currently 98.4% leased, up from 87.6% at 3Q. The project will stabilize during the first quarter of 2019, more than a year ahead of pro forma. Nashville posted positive net absorption of 181,000 square feet during the quarter, as reported by CBRE.

Market occupancy ended the year at 90%, an improvement of 20 basis points from last quarter. We are currently tracking 2.5 million square feet of competitive spec space, around 10% of competitive stock, that is currently 17% pre-leased. We expect approximately 1 million square feet will deliver in 2019 and is currently 39% pre-leased.

We signed 120,000 square feet of second generation leases at strong GAAP rent spreads of 32.1%. As a reminder, Virginia Springs I, which was 34% pre-leased at announcement, is now 100% leased and will be placed in service during the first quarter, more than a year ahead of pro forma.

Lastly, Tampa experienced positive net absorption of 136,000 square feet for the year, as reported by Cushman & Wakefield. This was driven by strong gains in Westshore and downtown, partially offset by negative net absorption elsewhere in the market. Class A rental rates were up 3.6% compared to a year ago.

Approximately 580,000 square feet is currently under construction, less than 2% of total stock. We signed 189,000 square feet of second generation leases at 23.8% GAAP rent spreads and ended the year at 95.3% occupied, up 240 basis points since last quarter.

The most activity was at SunTrust Financial Centre in downtown, where occupancy finished in the high 90s. We've substantially outpaced our occupancy and rental rate expectations since acquiring the property in 2015. In conclusion, we had a strong year of leasing, driven by robust rent spreads and de-risking our future expiration schedule.

As we start 2019, the environment remains healthy and is indicative of continued demand for quality, well-located office product.

Mark?.

Thanks, Ted. As Ed and Ted outlined, 2018 was a productive year for our Company. Our financial performance was strong as we delivered FFO of $3.45 per share, toward the high-end of our original range. The upside compared to our original outlook was driven by higher than expected GAAP NOI.

During the year, we also announced $285 million of 98.3% pre-leased development and delivered $85 million of projects that were 99.6% leased. For the fourth quarter, we delivered net income of $0.51 per share and FFO of $0.86 per share.

There weren't any sizable unusual items in the fourth quarter, and for the first time in 2018, Q4 included no unusual items related to 11000 Weston. As a reminder, we recognized restoration fees in Q1 and Q2 and we received accelerated rent payments in Q3.

We did recognize a small land impairment charge that netted to less than $0.005 of FFO impact related to a non-core industrial land parcel in Atlanta that we expect to sell in 2019. We also sold $55 million of non-core properties, which closed late in the fourth quarter, and therefore didn't meaningfully impact our Q4 financial results.

We estimate the full year dilutive impact of these sales at approximately $0.02 per share. We provided our initial 2019 FFO outlook of $3.44 to 3.56 per share. At the mid-point, FFO was up approximately 1.5%, but as Ed highlighted, this would have been up 3.8% after adjusting for several items that distort the year-over-year FFO comparison.

These items include; $0.036 per share of restoration fees related to 11000 Weston recognized in 2018 that will not be recognized in 2019; $0.022 per share impact from certain in-house leasing costs that will be expensed in 2019, which were previously capitalized; and $0.019 per share from the dilutive impact of late 2018 dispositions.

Our outlook for 2019 same property cash NOI growth is 2% to 3%. We posted 0.7% growth in 2018, or 1.1% when adjusting for the impact of the disposition of Highwoods' Preserve I in the fourth quarter of 2018 that wasn't in our outlook.

The improvement in same property cash NOI growth in 2019 is driven by continued growth in rents, holding the line on OpEx, partially offset by modestly lower average occupancy. We expect same property growth to start low and improve steadily as we move throughout 2019. Our year-end occupancy target is 91.25% to 92.75%.

We expect occupancy will dip early in the year before recovering in the second half. Finally related to our outlook items, we expect G&A in the range of $40.5 million to $42.5 million. Adjusting for the new GAAP requirement to expense certain in-house leasing costs, our 2019 G&A would be down 2% at the mid-point of our outlook.

As you know, these previously capitalized costs were recognized as leasing costs in our CAD reconciliation, and therefore won't impact any prior year comparisons to CAD. Last night, we also announced an increase in our annualized dividend from $1.85 per share to $1.90 per share.

Our strengthening cash flow outlook is bolstered by $195 million of 100% pre-leased development scheduled to deliver in 2019. When evaluating the dividend, we balance our needs for capital reinvestment in the portfolio and our taxable income levels. We maintained our fortress balance sheet in 2018, while investing heavily in our development pipeline.

We invested approximately $195 million in development projects during the year, acquired a $25 million well-located development site in CBD, Nashville, sold $86 million of non-core properties and issued no shares on the ATM, all while holding our debt plus preferred to EBITDAre ratio steady at 4.8x.

We haven't issued any shares on the ATM since the second quarter of 2017. We're committed to grow within our targeted debt-to-EBITDAre operating range of 4.5x to 5.5x and have the flexibility to fund the remaining $330 million on our current development pipeline without the prerequisite of issuing shares or selling assets.

We remain confident in our ability to fund our growth initiatives and maintain a strong balance sheet. Finally, as we mentioned previously, we obtained $150 million of forward starting swaps that lock the underlying 10-year treasury, and in the fourth quarter we obtained another $75 million of forward starting swaps.

So we now have $225 million of notional principal that locks the US 10-year at 2.86% in advance of a potential financing before July of 2019. If we move forward with the financing, we would expect to use the proceeds to repay our $225 million term loan that matures in June of 2020 and reduce borrowings on the line of credit.

A potential long-term financing has been contemplated in our outlook range. Operator, we are now ready for your questions..

Thank you very much. [Operator Instructions] And our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please go ahead..

Great, thank you and good morning. I just wanted to get your thoughts on just, you think about -- you talked about some of the larger leases, you're looking to backfill or largest vacancies you are looking to backfill.

Can you just talk us through how you thought about that for guidance?.

Hey, Jamie, it's Brendan. Yeah. So we've got, in terms of the guidance outlook for the end of the year, 91.25% to 92.75%. So there was a pretty wide range that's there and it includes a variety of lease-up scenarios within there.

And so, I think we have general expectation that we would backfill a good portion of some of the larger vacancies that we talked about and Ted ran through some of that in his prepared remarks, but there's a variety of stuff that's out there. So I think that probably gives you a sense of where we are.

But we've done well in terms of the interest and commitments that we have at the FBI space in Century Center and then I guess the other big one that maybe we would speak about would be Fidelity at 11000 Weston in Raleigh, where at the midpoint of the range we've got probably a little bit scheduled to come on line by year-end, but I wouldn't say that it was a major driver of the range in terms of one way or the other..

Okay.

And I'm sorry in terms of FBI, you're saying you did include that or you didn't include that?.

Yeah, as Ted mentioned, we've got a lot of that under LOI. So I think we're about 83% in terms of committed under LOI. So, we do have a good portion of that coming into occupancy by the end of the year as reported in the outlook or as given in the outlook..

Okay, by year-end.

And then the T-Mobile space, I mean, how much of an impact do you think that is on NOI? I know you said 1Q20, that's the move-out now? What do you think the impact is on same-store and NOI overall?.

Well, it's zero for '19 because they are into -- we were able to extend them out into April of 2020..

Yeah, Jamie. So I guess if your question is, what would the impact be upon vacate and assuming no backfill on that for a year? It's probably in the range of 60 basis points to 75 basis points on same-store. In that, I'd say, probably 60 basis points to 70 basis points would be a full-year impact in terms of just no relet on that space.

But as Ted mentioned, that'll be through the first quarter of 2020. So even in 2020 with no backfill of that space, we'd still have a partial year NOI from T-Mobile..

Okay. And are there any other no [ph] move-outs now in '20 that are sizable? I know it's a ways off..

Jamie, it's Ted. Not really. In 2020, we've only got three leases that expire greater than 100,000 square feet. We feel good about two of them. Third is T-Mobile, which we know is going to be a move-out. So of the large upcoming 2020 renewals, we feel good about our largest ones..

Okay.

And then I guess in terms of the Nashville land site, the 1.2 million square feet, I mean, how do you think about putting that to work now? Is it something that you kind of want to see how Amazon plays out and how fast they grow or you'd be willing to put that to work soon? What's your strategy there given that this could be a very long-term play?..

Jamie, it's Ed. So I think the way that we consider that track is that we would want a meaningful anchor customer before we started that building. So, we are well advanced in our design development concepts. The property that equates to the 1.2 million is really two towers on a eventually combined podium. So we can do it in smaller segments.

But given the volume of spec construction that is under way in downtown now, even with Amazon stepping in for what they're going to occupy and the inertia that they bring to the sub-market, I think we'd be cautious about starting anything with the significant amount of spec space downtown today.

But we are pleased to have a very attractive design and the capability to pull the trigger, if we were fortunate to secure a major anchor customer..

Okay, thank you. And then just last question for me is on your build-to-suit pipeline.

Any thoughts or can you provide any color on what markets you think some of those projects might be in?.

Well, it really comes back to those which are mature most active, which are Raleigh, Nashville, Atlanta, Tampa, Pittsburgh where we have the most conversations ongoing. We have appropriate land sites, we have building designs. We're in the hunt.

As you know, you never know when a prospect becomes an actual customer for us or anyone else and that -- oftentimes, they start out considering what tax incentives they can secure doing certain demographic studies.

But we are in our routine number of conversations with prospective users that as we've said in the past, you may or may not come to fruition for the market or for us, but we do have a similar amount of conversations ongoing with prospective users that we typically do..

Okay, great. Thank you..

Sure. Thank you..

And the next question is from Manny Korchman with Citi. Please go ahead..

Hey, good morning, everyone. Ed, going back to your comment on the acquisition guidance, which has been the same last few years that you have not found anything.

What is it that maybe specifically is precluding you from buying? Are you just getting outbid or assets that's not meeting your quality criteria and then how much of that makes you look at new markets if any?.

So you did a great job really of answering the question. You're spot on, it's either quality and that could be from when it was developed and the quality could relate to the pure design development and there'd be issues with regard to floor plates or ingress/egress or adequate parking or how the building looks and/or functions.

And then the second, there have been some buildings that we would like to own because we find the quality attractive but the bid number, it's not that we can't afford it, but I don't think that we would be good allocators of capital if we invested at those certain numbers because it takes such a long time forward to get to a point where we think it yields the appropriate return.

And oftentimes even at that, your underwriting has to be darn near perfect in order to achieve those acceptable returns.

So given the volume of cash that remains on the sideline, certainly we're seeing the number of bidders in the bidder pool to be less than what we saw a number of years ago, but very, very capable bidders and it just gets to a number that we become uncomfortable with.

The third part of your question with regard to other markets, it's really not we're looking at other markets, it's a result of the guidance that we provided for acquisitions for now three consecutive years, we've routinely been doing that.

And I know it's been a while since we went into a new market, when we went into Pittsburgh in 2011, but we make a routine exercise at looking at other markets that makes sense for us, both in scale and demographics and proximity. And so that's something that we routinely have ongoing.

We just need to find the right opportunity from a price point and scale, so that we can go in and establish a beachhead..

Thanks for that. And then Ted maybe digging a little bit deeper into Jamie's question.

When you think about the requirements that you're seeing whether it be for build-to-suits or backfill, how many of those are out of market or new to market tenants that are looking to relocate and has the pace of or the volume of tenants looking to move out of a market, including yours, changed recently?.

Sure. Really, it varies by market, Manny. A couple of our larger new deals we signed fourth quarter, one was a big law firm, those were out of market down in Tampa. That was, I think, our second largest new deal. So it's really a mix of out of market and moving different sub-markets within the same sub-market. So we're seeing some of that as well.

So it's intra-submarket move, as well as seeing still continued good demand from out-of-market customers. Certainly, in Atlanta, Nashville and Raleigh, probably the three most that we're seeing out-of-market moves.

Specifically in Raleigh, we're seeing a lot of technology companies that are typically based -- have been based in California that maybe a couple years ago set up shop in one of the co-working shops and they've outgrown that and now they're looking to a direct with us. So we've probably seen seven or eight of those in the last year.

So really it differs by market and we're seeing it from our own customers as well, still pretty good organic growth and expansions throughout our portfolio..

Thank you..

Thanks, Manny..

And our next question is from Rob Stevenson with Janney. Please go ahead..

Good morning, guys.

What are the current stabilized yield expectations on the $487 million development pipeline and where are you expecting the new GlenLake project to come out?.

So, Rob, as you know, we don't give return specifically by project because we find ourselves almost routinely in conversations with prospective users and working with the brokerage community, so we've really tried not to pit one against another.

But we have disclosed, and we have achieved A plus percent GAAP return on our development projects and we've been able to do that for a sustained period of time and that's what we continue to underwrite too..

Okay.

And the increase in material and labor costs, has it materially impacted that?.

Well, it has. It's just become more expensive for the user, but it has -- we have not compromised on our return. And it's just a matter of you are backing into the number..

Okay. And then you guys did 2.8% same-store expense growth in '18 after about 90 basis points in '17 and 30 basis points in '16.

In your 2% to 3% same-store NOI guidance, does that assume that expenses normalize back down to a lower level or is the sort of current 2% to 3% expense growth the new norm in your market these days?.

Hi, Rob, it's Brendan. I think it's in the 2.5% range is generally what we've assumed with respect to OpEx growth in that outlook range that we provided.

So we'd say that that's an inflationary level, increase in normalized level of increase and so I think that's probably what you should expect with the top line roughly mimicking that at the midpoint of the range..

And a good component of that, Rob, comes from real estate taxes and then the labor portion that we need in the way of janitorial security landscape, window washers, etcera..

Okay. The labor -- it leads me to the next question, I mean, adjusting for the accounting change, it looks like another sort of flat year for G&A expenses for you guys.

You've been like $37.5 million to $40 million in each of the last four years, can you talk about how you're doing that given the tight labor market and what sort of pressures you're seeing there?.

We all have high mileage cars. We feel like we have a very strong base in the way of the systems and people that we have in place. We have reduced our amount of overall square footage and building count and we've migrated toward more square footage in the single address versus where we were some time ago with a lot of smaller buildings.

Our lease terms have been extended. So we think with the platform of people and systems and the migration from smaller buildings to bigger buildings and longer lease term has helped us do that..

Okay. Thanks, guys. Appreciate it..

Thanks, Rob..

Next question is from Blaine Heck with Wells Fargo. Go ahead..

Thanks, good morning. So just a follow-up on the market by market discussion and demand you're seeing maybe for Ed or Ted.

Can you just go through your expectations for rent growth in your top markets in 2019 and possibly rank them from strongest to weakest?.

Sure. I may put them in couple different buckets. But certainly the strongest markets today would be Nashville, Raleigh, Tampa might be the top three, followed closely by Atlanta and then really the other markets are probably grouped together, a little bit slow growth, but they are just slow and steady.

So we're seeing, I'd say, 2% to 5% across the portfolio, the upper end at the first three or four markets I mentioned and the others are in that probably 2% to 3% range.

In general, all of our markets are healthy today, we're seeing demand, and tour activity is good across our markets, both from existing customers needing to expand, potential new customers and out-of-market new prospects. I think just our leasing teams are doing a heck of a job capturing the demand that's in the market..

All right, Great. And then for Mark or Brendan. I just wanted to touch a little bit more on the same-store NOI cadence throughout the year, you guys seem to be coming into the year a little bit below the midpoint of 2019 guidance and I'm assuming you guys are still anticipating some free rent burn off on leases you executed in 2018.

So can you give us any sort of commentary on when we should expect the free rent to burn off and how much of an acceleration we should expect in same store in the back half of the year from higher occupancy and increased cash flow?.

Yeah, Blaine, it's Mark. You are correct. We do expect and you heard in the prepared comments that we expect the NOI to accelerate through the year. So we're giving you the range, a 2% to 3% same-store number. But you're right, it should improve over the year as straight line burns off and some of the concessions go away.

Also operating expenses, keeping those under control is important to us. So, I think that's what you should see as a ramp up through the second half of the year..

And Blaine, just to give a little bit of specifics in terms of some of the trend lines and how we're thinking about that, and this is to follow up with Rob's question as well.

So we do expect that occupancy on a year-over-year basis for same-store 2019 versus 2018 to be a little bit lower, which if you think about the occupancy trends that we had in the portfolio in 2018, we started the year high, we ended 2017 at 92.9% and then we ended 2018 at 91.9%.

So as we move throughout the year-over-year comparisons, it's little bit lower on occupancy in the same-store pool '19 versus '18. And from a straight-line perspective, there is not a big headwind or tailwind., it's not a big impact in terms of kind of overall -- for the overall year.

But as Mark mentioned, that tends to get more favorable as we move toward the back half of the year and the occupancy headwinds are more pronounced in the beginning part of year than they are in the latter part of the year and so that's what we think in terms of what you'll see trajectory wise..

Okay, that's helpful. Thanks..

And your last question comes from Dave Rodgers with Baird. Please go ahead..

Good morning, guys.

Ted, I just wanted to start with you, just in terms of tenant decision-making, are you seeing any changes, elongation, shortening of the period of time that's it's taking tenant to make decisions in kind of your showings etcetera?.

Yeah, I think, across the board, probably not a whole lot of change. I will say that we're in discussions with the GSA on a few renewals and that did get slowed down over the last month or so. But I think in general and probably on par with the last few years, really not seen a whole lot of change, but it is deal by deal.

There's times that we think a deal is going to get done pretty quick and it ends up taking quite a bit longer, but I don't think it's a trend we're seeing..

Dave, I would footnote to that, that there was a very measurable sea change that occurred after the global financial crisis that our prospects and customers became much more deliberate in the way that they decided how much space they would take and there was a significant effort toward space programming, and designing efficient uses in full place today versus before that.

Before that, it wasn't cavalier but it was a little bit more cowboyish than it is now, it's a very protracted, deliberate process and I think that the commitment to that has sustained since 2009, 2010 era..

Great. Well, that's helpful. Both of you, thank you.

Can you talk a little bit about any changes in construction costs that you're seeing as well as land cost changes? Is it some of those increases abating or they've been pretty consistent?.

They've been pretty consistent on the construction side. We've been saying for some time now, it's about 0.5% a year and that has varied by line item depending like as an example, much more labor sensitive now than it was at the start of this climb and it's varied from different commodities from glass to steel to lumber, etcetera.

But labor is a very significant component of that right now, but again as I mentioned in a earlier answer, you know, we factor that in. And as a result, those who are looking for first gen space are clearly, having to pay a premium to move into that.

But I don't think that it's anything that varies dramatically from one corner of the country to the other. We're all generally buying out of the same pool, so that just kind of makes it soggy on both sides of the line of scrimmage..

Great. And then, Ed, maybe a last question from me. Just in an answer to an earlier question you mentioned kind of less bidders in the pool for acquisitions that you're competing against but still being pretty well-heeled.

But in terms of less bidders, does that make you think more aggressively about kind of exiting some of the non-core assets in non-core markets here in the near term and maybe beating that, the disposition range as you think about kind of beating those bidders to the punch..

Yeah, that's a good strategy, Dave. Unfortunately, we don't find a significant amount of crossover between those buying that we're selling that are from the lower end of the quality versus the top end of the quality.

So, those that we're competing with, as you say, who are well-heeled and capable for the institutional quality trophy urban asset versus some of what we've been selling, it's a bit of a different buyer pool.

So we're seeing cap rates in the mid-7s to mid-8s on what we're selling, and, obviously, a much smaller scale versus what we're seeing on those we compete with for the trophy assets. I mean, there is a good bidder pool but it's just a different composition..

And I do think we've talked about whether cycles are getting elongated or not. I do think on some of the dispose, the sales cycle, for some of the stuff we're selling, it can be longer certainly than what it would be on an acquisition for the type of properties we're buying..

Great. Appreciate all the comments..

Thanks, Dave..

[Operator instructions] Our next question is a follow-up from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead..

Great. Thank you. I just wanted to get your latest thoughts on co-working or flexible lease providers.

And just as you guys think about how your market, the adaptation or the acceptance of you guys and even competitive landlords in your markets has changed in the last couple of years? And maybe if you could just kind of walk through what you think the current state of affairs is and what we should expect to see?.

Sure. As you stated, the co-working industry just continues to evolve at a very rapid pace and it's sort of part of the overall change I think going on with the traditional office model.

I think companies are understanding that their office space, they need to recruit and retain the best talent and, therefore, they're going to highly amenitized spaces, some within co-working. some not. And the co-working model itself has changed and it started out going for the individual small companies and the sole proprietors.

They are now moving quickly into the enterprise, what they call the enterprise business model targeting medium and large companies. So it's changing. I think more landlords today are more interested in the model. I think this model is here to stay, co-working is here to stay. And I think landlords are understanding that.

And therefore looking to partner with some co-working operators, there's lots of different ways people are doing it. But I do think it's aggregating a lot of the demand that is looking for that kind of space.

So from our standpoint, how we look at it, we've done six transactions with co-working operators, just a reminder, in five different markets, and it's been a great experience so far, I think it's been good for both the customer as well as us.

And as we've said on previous calls, even earlier this call, we've been fortunate to capture demand from several companies that have outgrown their co-working space. So it's been advantageous to have them in our buildings. I think we've got examples in probably all of our markets, where companies have come to us after they've outgrown their space.

So continues to change, I think it's going to continue to accelerate the pace of change and it's, again, something we continue to watch..

And Jamie. I would just add to that. From a scale perspective, the average footprint of the six leases that we've done, that Ted referenced, is 29,000 square feet. So we're not to 125,000, 150,000 [ph] in our footprint, it represents only 0.85% of our annualized revenues.

I'd also say that we are trying to be very sensitive to what it does to the customer mix and be sure that we don't do a co-working lease to the detriment of the rest of our customers in the building. So we're very careful about the mix and the scale of how much co-working space is taken in comparison to the building community as a whole.

And then maybe the last thing I'd just footnote is, the thing about co-working space, in my view, is that there is no pattern on that. I mean, they don't have the secret sauce to Coca-Cola or Bone Suckin' Sauce up here. This is an item that we could replicate to some degree in a plug-and-play type environment by creating a communal place.

We may not go to the extent of having the bowl of granola bars and the concierge, but there is a plug-and-play way for we as traditional landlords to be able to offer our customer base a product that's akin to co-working..

That's great color. Thank you. So I guess that last point you made.

Ed, I mean, does that mean -- what does that mean in terms of spending in additional CapEx needs?.

Well, I'd think that with the way that -- if we were to do some of the space, which we're working on, we probably wouldn't do it quite as smaller scale by desk, by chair, it'd be more a small open suite that abuts to another small suite for the floor plate and then we'd have some communal area, where they could collaborate or relax or get away from their work table.

But these leases that we've done have been straight up leases, we don't have any leases that are the management agreement type leases. We have one that's a hybrid, but there is a base rate in place.

So I think when you do the management, that's when you really need to think that carefully given the volume of CapEx that you need to outlay and what you're getting in the way of the return in base rent not being there versus you have kind of an interest in the business..

Okay.

So I should take that to mean you're probably not going to those types of leases?.

Well, I think never say never. I wouldn't want to say that, but we certainly haven't to date, but I just don't want to say never..

Okay. All right, great Thank you..

Thanks, Jamie..

And gentlemen, those were all the questions we have. I'll turn the call back over to you for any closing remarks..

Again, thank you everyone for dialing in your good questions. As always, we're available for any other questions that you may have. Thanks so much..

And ladies and gentlemen, that concludes our call for today. We thank you for your participation. Everyone have a great rest of your day. And you may disconnect your line..